Vietnam looks to attract more foreign investment to sustain growth trajectories. The government hopes that changing regulations of foreign ownership of its banks will attract more capital.

To boost growth of the Vietnamese banking system, the Vietnamese government will allow foreign investors to own a bigger share in its banks. However, many fear that this decision lacks the power to create enough positive change on the stock market and sustain future economic growth.

The limit for ‘foreign strategic investors’ will be increased to 20 percent from the previous 15 percent, starting on the 20th of February 2014. However, total foreign ownership in a bank will still be limited to 30 percent, except for special cases to be approved by the Prime Minister. To have a substantial influence in a bank, an investor would typically have to own at least 30 percent.

Tay Han Chong, the CEO of Mekong Development Bank, suggested the ideal ownership ratio for foreign investment is 50 percent or more. As a certain degree of control is what foreign investors aim for, the changes in regulation are not expected to make a big difference.

At the moment, there are already some who hold large stakes in Vietnamese firms. For example, Japanese Sumitomo Mitsui Financial holds 15 percent of Eximbank shares, or Mizuho Financial, which holds 15 percent of Vietcombank.

The State Bank of Vietnam has also set up an asset management firm to buy bad debt of lenders, hoping to tackle a high ratio of non-performing loans (NPLs). Vietnam’s NPL figures have doubled, with bad debts reported at VND2.254 trillion (US$108 million) at the end of the first half of last year, up 147% from the VND912.5 billion figure reported at the start of 2013. This indicates that the problem is acknowledged, as banks are beginning to face up to their terrible debt problem.

Vietnam’s overall economic growth has been high over the past two decades, as improvements in education as well as infrastructure have allowed workers to move into higher productivity industrial and service jobs. However, Vietnam still needs to improve the quality of its labour force to reduce current skills shortage, as reported by the World Bank. Its economic growth of 5.4 percent in 2013 was below Vietnam’s full potential.

Vietnam’s financial markets can help reach this potential, but they still have a lot of developing to do. This recent change in foreign ownership regulation indicates a further step towards economic freedom. Vietnam’s communist government has promised more reforms, as Vietnam’s economy has been badly hit by high levels of debt and low levels of spending.

Author:Margaux Schreurs

Margaux is a graduate from the London School of Economics and Political Science with an MSc China in Comparative Perspective with a focus on a comparison between North Korea and China. Having grown up in Singapore, she travels widely in Asia and has spent extended amounts of time in China and Vietnam, and speaks both Chinese and Vietnamese. She has a BA Development Studies and Economics from the School of Oriental and African Studies with a regional focus on East and Southeast Asia, and focuses mainly on these regions as a freelance writer. As a recipient of the Chinese Government Scholarship, she is studying Chinese at Beijing Language and Culture University, in preparation for further academic research in China.